Economics - 3.4.6 - Monopsony - A Level

Monopsony power

A pure monopsony exists when there is only one buyer in the market. This is rare in practice. There are, however, examples of monopsony power. The greater percentage of total sales a firm buys from a market, the greater monopsony power it is likely to have. If a firm only has limited monopsony power, suppliers are likely to be able to resist the demand of the monopsonist if it won't buy its products. However, the greater monopsony power, the less able suppliers are to find other customers.

Output of monopsonists

Economic theory suggests that monopsonists pay lower prices to suppliers than if the market were competitive. This means the suppliers will supply less to the market, meaning both equilibrium price and quantity fall compared to a perfectly competitive market. The exact amount that a profit maximising monopsonist will buy is determined by the MC = MR rule. If the supply curve slopes upwards, this means the monopsonist has to pay a higher average price if it wants to buy more from the market, but the marginal cost of buying it is higher than this average price. Thus price rises as quantity supplied increases. Marginal cost rises as more is bought because of this.

Diagram of monopsony

In a perfectly competitive market, equilibrium output would be at B, but if there is a monopsonist in the market, it will see to buy at a lower price, E, meaning that supply will restricted to A.

Costs and benefits of monopsony to suppliers

Suppliers are likely to lose out, as prices paid for their goods and services will fall. For example, farmers would see their prices fall in a supermarket monopsony (farmers can often start growing other crops or be forced out of the market), or workers will see wages fall when only one person employs their labour.

Costs and benefits of monopsony to customers

The effects of customers depend on a variety of factors. Some lower costs for the buyer are likely to be passed on, however there will also be likely restriction in supply. The extent to which it falls depends on the PES in the market. For example, with high price inelasticity, there will be little fall in supply.

Costs and benefits of monopsony to employees

The impact here is uncertain. Purchase costs for the employer will be lower, but it will purchase less, meaning more workers can be hired, but they may also not all be needed. For employees of the seller, some will be laid off as the supplier will employ fewer workers.

Costs and benefits of monopsony to the monopsonist

The monopsonist gains higher profits by being able to buy at lower prices, reducing costs of production and likely leading to an increase in output because of the downwards shift of MC. Supply of inputs however, will fall over time.

Monopsony in the real world

There are very few pure monopsonists in the UK but there are a number of markets where one buyer dominates. For example, Network Rail dominated the market for the purchase of rail track maintenance. The government dominates the market for the hiring of teachers.

Bilateral monopoly

This occurs when a monopsonist faces a monopolist. This particularly happens (and economists particularly focus on) with labour markets with one buyer and supplier, for instance teaching, with the government and a trade union facing off. This means that price and quantity demanded and supplied will be higher than in a market where the monopsonist faces many sellers, meaning greater allocative efficiency in the market.

Monopsony

When there is only one buyer in the market. It also has to possess the same characteristics as a monopolistic market apart from the difference between buyers and sellers. Sellers in the market must not be able to sell their product to other firms outside the market.